Top tax tips: EMI Scheme enhanced so more business owners can benefit from 10% rate

Lesley Stalker
Tax Partner
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EMI, the Enterprise Management Scheme has proven to be a very useful and tax efficient method of offering share options to employees (which of course include business owners as directors of limited companies).

Some enhancements to the EMI scheme were announced in the recent Budget, which will make it is easier to get access to Entrepreneurs' Relief (ER) through EMI. And in addition to broadening access to the scheme itself, the individual limits to the amount of shares that can be held have also been increased creating another bonus for business owners.

The key changes which make EMI more attractive for tax planning are as follows:

The value of EMI options that can be held by any single individual will be increased to £250,000 in the future, although we don't yet know when. Enhanced support for start ups has also been promised. 

There will be an improved position for share owners in relation to qualifying for entrepreneur’s relief (ER) - this is due to be announced in the 2013 Finance Bill - and means business owners can pay just 10% tax when business assets are sold, provided certain qualifying criteria are met.  

Under normal circumstances, you would have to have owned shares for at least 12 months prior to a disposal and have a minimum 5% holding to qualify for ER. Although the exact details have not yet been announced, it is expected that although the 12 month ownership ruling will remain, for shareholders within an EMI scheme, it will not be necessary to have a 5% holding to qualify for the 10% tax rate upon disposal of the business. This is welcome news for EMI scheme members and a powerful additional staff motivator because under the old rules, most employees with EMI options would not hold a large enough stake in the company to be able to benefit from this tax relief.

Another positive development affects entrepreneurs with academic links. In the future, university initiated research initiatives spun out as a business will also qualify for ER. This change will be useful as in most instances, company directors in this position would not be eligible for the 10% rate because they would not satisfy the full time working criteria.

It is also likely that other announcements to improve access to other tax efficient share ownership schemes will also be included in this year’s Finance Bill, although we do not have further detail at this stage.

We think that now is an excellent time to consider an EMI scheme because it will become even more tax efficient than it already is. Added to this, whilst you may not be able to offer your most valuable staff members pay rises at the moment, shares in a growing business are a powerful motivator and a very good way to retain their loyalty in the long term.

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